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With the third quarter economic data now released, we can give you an update on the progress of economic rebalancing in China. For an explanation of these indicators and why they are important, refer back to our original post on the topic.
1. Disposable Income Growing Faster than GDP
Disposable income continued to grow moderately faster than GDP in the third quarter, 13 percent versus 10 percent in nominal year-on-year terms. This indicator will remain only slightly positive until we are confident that disposable income’s faster growth is more than just the result of a slowdown in GDP growth.
Indicator = Slightly Positive (4/5)
GDP and Disposable Income Percent Growth YoY (ytd.)
2. Positive Real Interest Rates on Deposits
Interest rates remain positive on one-year deposits, keeping just above one percent in real terms for the quarter. The average for the past two quarters is just below 1 percent. However, these positive rates are still the result of abnormally low inflation, rather than a significant change in interest rate policy. Therefore our rebalancing indicator will remain only slightly positive.
Indicator = Slightly Positive (4/5)
Real Interest Rate on One-Year Deposits
3. Residential Real Estate Investment Growing at a Slower Pace than GDP
The gap between residential real estate investment and GDP continue to shrink, indicating that the unsustainable growth of the real estate market has slowed dramatically. Given the progress made on this indicator over the past several quarters, we will upgrade this indicator to neutral from slightly negative.
Indicator = Neutral (3/5)
GDP and Residential Real Estate Investment Percent Growth YoY (ytd.)
4. Loans to Small Enterprises Growing Faster than Total Enterprise Loans
Loans to small enterprises continue to grow significantly faster than overall loans. This positive indicator for economic rebalancing remains unchanged.
Indicator = Positive (5/5)
Total Enterprise and Small Enterprise Loan Percent Growth YoY (ytd.)
5. Faster Growth of the Tertiary Sector than the Secondary Sector
Growth of the tertiary sector has accelerated relative to the secondary sector. If this trend continues for another quarter or two we will upgrade this indicator from slightly positive to positive.
Indicator = Slightly Positive (4/5)
Secondary and Tertiary Sector Percent Growth YoY (ytd.)
Overall: The third quarter showed a slight improvement for China in terms of rebalancing indicators. While there were no major changes, things continue to move in the right direction, albeit more slowly than optimal. One lingering question is the extent to which this rebalancing is the result of weak GDP growth. A sharp pickup in growth next year, especially if it's driven by stimulus-funded investment, could undo some of the progress that has been made. Overall Grade = B (20/25).
Indicator Grading Scale:
Negative = (1/5)
Slightly Negative = (2/5)
Neutral = (3/5)
Slightly Positive = (4/5)
Positive = (5/5)